Treasure Chest: Resource Sector Takeover Possibilities

This story features WHITEHAVEN COAL LIMITED, and other companies. For more info SHARE ANALYSIS: WHC

By Greg Peel

Whitehaven Coal ((WHC)), suggests PhillipCapital, is a prime target for resource sector companies seeking investment in tier one assets.

Whitehaven’s new management team is building a strong track record in boosting the performance of the Narrabri underground mine to world class levels while reducing costs, suggests analyst Lawrence Grech. Meanwhile, the Maules Creek development is on track for first coal shipments in March 2015 on an initial low cost, building in output and quality options over two years to add 8.3mtpa production for Whitehaven’s 75% stake.

Weak coal prices and a 7% rise in the Aussie dollar this year have sent the WHC share price south, masking Maules Creek progress, notes Grech. Profitability should re-emerge in FY16 but strategic investors may bid first to secure the upside of Whitehaven’s tier one Gunnedah Basin assets.

After “margin crushing” falls, coal prices appear to have stabilised and the seasonal lift in northern summer power demand along with China steel mill restocking could see coal prices rise. Grech notes strategic asset buyers have recently bid for undervalued assets in anticipation of higher prices, such as Aquila Resources (iron ore/coal) and PanAust (copper).

PhillipCapital has a Buy (High Risk) recommendation on WHC with a $3.13 target.

Moving to the energy market, Cooper Basin explorer/developer Drillsearch ((DLS)) has made a takeover bid for Ambassador Energy ((AQO)). Bell Potter suggests the attraction for Drillsearch is Ambassador’s 47.5 % owned Patchawarra Trough asset and the deep, thermally mature dry coal potential of this underexplored region. Such coal has proven the source of 90% of the coal seam oil and gas found within the Cooper.

Drillsearch has offered only a 7% premium for the thinly-traded Ambassador based on the most recent farm-out deal and the board has recommended shareholders accept. But Bell Potter’s attention is directed away from the Patchawarra Trough, where exploration has been scant, and towards the Southern Cooper assets of Strike Energy ((STX)).

Strike has secured three non-binding memoranda of understanding to support the development of its project. With an enterprise value of $52/acre, Strike trades at a substantial discount to the value of $148/acre implicit in Drillsearch’s effective offer price for Ambassador, notes Bell analyst Di Brookman.

Brookman suggests the Ambassador takeover may generate the attention the Cooper coal story deserves. The market is not appreciating that Cooper CSG is not biogenic CSG associated with substantial water (such as in the east coast fields) but thermogenic gas from deeper, dry, porous and permeable coals which store abundant gas, as has already been established at Cooper wells at Moomba, Roswell and Panning.

Thus without making the call directly, Bell Potter is implying Strike Energy should also be drifting onto the radar screens of strategic investors. Bell has a Buy (Speculative Risk) recommendation on Strike with a target of 23c.
 

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